Zapatero Heads to Spain Budget Victory After Getting Majority

Spanish Prime Minister Jose Luis Rodriguez Zapatero is headed to victory on the country’s deepest budget cuts in three decades after striking deals with regional parties to support his 2011 fiscal blueprint.

Coalicion Canaria, a party with two seats representing the Canary Islands, agreed yesterday to back Zapatero in exchange for concessions to the archipelago off the west coast of Africa, Canary Islands President Paulino Rivero said.

By winning allies for his proposals, Zapatero may be able to complete the remaining year and a half of his term. A loss on the budget might have led to early elections. The accord, along with an Oct. 15 agreement with the Basque Nationalist Party, gave his minority Socialist government 177 seats out of 350. The budget debate started today at noon in Madrid, with lawmakers voting on it tomorrow.

“For Zapatero this is a huge win because if he didn’t get this, his government was going to fall,” said Ken Dubin, a political scientist who teaches at Carlos III University and IE business school in Madrid. “Clearly they’re going to be able to get to the end of the legislature.”

Paving the Way

The alliances also clear the way for Zapatero, whose initial package of austerity measures passed in May by one vote, to overhaul the pension system and employment policies as the country emerges from the deepest recession in six decades.

“Spain wins because we have to get out of the crisis by working and seeking consensus,” Rivero told reporters after a meeting with Zapatero yesterday. “The commitment aims for responsibility and institutional stability that will allow structural measures to be adopted.”

Still, Zapatero faces criticism from opposition lawmakers for making concessions to the regional parties. The agreement with the Basque party opens the way for more powers to be transferred to the region as well as 112 million euros ($156 million) for scientific research in the Basque Country.

Rivero said the deal was “historic” for the Canary Islands, which will get control of employment policies and the internal waters of the archipelago.

The Socialist government is planning the most austere budget since at least 1980 as it aims to halve the deficit in two years. Finance Minister Elena Salgado defended the budget in the debate today, saying she’s “convinced” the deficit and growth forecasts are “realistic.”

Growth Forecasts

The budget is based on a growth forecast of 1.3 percent for 2011, almost twice the 0.7 percent rate estimated for next year by the International Monetary Fund. The government sees the economy shrinking 0.3 percent this year in the second annual contraction.

If more measures are needed to cut the deficit to 6 percent of gross domestic product next year from 11.1 percent in 2009, the government will take them “without hesitating,” Salgado said today. Spain’s budget gap is forecast to be the second- highest in the euro region this year at 9.3 percent.

The budget includes a new tax rate for high earners and scraps a universal tax rebate for mortgage holders, while 2011 will be the first year that a value-added-tax increase will be in place for a full year.

Zapatero has lost the support of traditional Socialist allies and of Catalan lawmakers who backed some of his earlier legislation. He made a policy U-turn in May, cutting public wages and freezing pensions under pressure from other European leaders and investors who were demanding higher premiums to hold Spanish debt rather than German equivalents.

Popularity Poll

The extra yield investors demand to hold Spanish 10-year debt rather than German bunds fell to 158.8 basis points today, compared with 161.7 basis points yesterday and a euro-era high of 221 basis points on June 16.

Zapatero’s popularity is also trailing in the opinion polls, with the opposition People’s Party extending its lead to 13.4 percentage points, according to a survey by Publico newspaper on Oct. 11. The prime minister has the lowest approval rating among party leaders, at 3.3 points out of 10, the poll showed.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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